MSCI is set to make a crucial decision by January 15 on whether to exclude companies with significant digital asset holdings from its indexes, a move that could have sweeping implications for the crypto sector. Analysts suggest that if MSCI goes ahead with these exclusions, other index providers are likely to follow, potentially dealing a severe blow to firms heavily invested in cryptocurrencies, notably Michael Saylor’s company, Strategy.
The controversy stems from MSCI’s proposal, which suggests that companies whose digital asset holdings make up 50% or more of their total assets should be classified similarly to investment funds, which are typically not included in MSCI benchmarks. This stance has drawn criticism from affected companies, who argue that they are active businesses innovating in the technology space rather than mere investment vehicles.
Since Michael Saylor’s firm began acquiring Bitcoin in 2020, its shares surged 3,000%. However, they have recently plummeted around 43% this year due to a significant downturn in the cryptocurrency market. As a result, many companies have followed Saylor’s lead, placing substantial amounts of digital assets on their balance sheets, hoping for value appreciation. However, as the market has deteriorated, doubts have emerged regarding the viability of these strategies.
MSCI is currently conducting a public consultation regarding its proposal, emphasizing the weight of client feedback in its deliberations. Analysts, including Kaasha Saini from Jefferies, speculate that the implications of such exclusions could extend beyond MSCI, influencing the broader landscape of equity indexes.
The stakes are particularly high for companies in the digital asset treasury sector, with passive asset managers estimated to control as much as 30% of large-cap companies’ available shares. The potential exclusion from MSCI’s indexes could lead to significant capital outflows, particularly problematic for firms that have financed their cryptocurrency purchases by selling stocks.
In a recently issued public letter, Saylor, along with Strategy CEO Phong Le, expressed concerns that being sidelined by MSCI could result in the liquidation of approximately $2.8 billion of their stock, with repercussions that might “chill” the entire industry. They believe such a move would effectively cripple their competitive edge in the estimated $15 trillion passive investment market.
Financial estimates suggest that Strategy’s market cap may lose $2.5 billion related to MSCI alone and $5.5 billion from other indexes like the Nasdaq 100 and various Russell indexes. This raises alarms about the potential outflows which could total up to $8.8 billion if excluded from multiple benchmarks.
As of September, over 200 companies categorized as digital asset treasury companies had achieved a collective valuation of around $150 billion, but the ongoing slump in cryptocurrency prices has resulted in several firms trading below the net asset value of their assets.
In addition to Strategy, MSCI’s preliminary list has flagged 38 other companies with a combined market cap of $46.7 billion that could face exclusion. Executives from some of these firms, such as Alexandre Laizet from Capital B, acknowledge the risks but note that the current impact on shareholdings by passive funds may not be severe at this moment.
The ongoing discussions surrounding the MSCI proposal have created a sense of trepidation among digital asset companies. Executives emphasize the critical role that access to passive investment flows will play in future growth, even as market responses to the potential changes seem to have already begun.
